* Global M&A-related issuance predicted to reach US$200bn in2016
* Europe prepares to cash in on blockbuster M&A
By Laura Benitez
LONDON, Dec 16 (IFR) - The European corporate bond marketstands to take a big chunk of a bursting M&A pipeline as ahigher US interest rate environment and trickier dollar marketbackdrop will lure borrowers across the pond.
Over US$82bn of M&A-related bond issuance has been publiclyannounced from an expected US$200bn pipeline, and some Europeanbankers say that as much as 25% of that figure could be comingEurope's way.
Europe has traditionally played second fiddle to the US bondmarket, which is notorious for easily absorbing multi-tranche,multi-billion trades. But US investors have become morerisk-averse of late, demanding higher premiums and more rigorouscovenants on new supply.
"The US credit market will be tested next year, so it willdepend on the reaction to the rates environment, but we estimatearound 20% of this year's M&A refinancing to be issued in theEuropean market in 2016," Jason Russell, deputy head of bondsyndicate at Societe Generale said.
Highly rated issuer Visa (A1/A+) had to pause before pullingthe trigger on a US$16bn bond deal to finance its acquisition ofits former European subsidiary last week and concessions paid bysome issuers have become elevated.
Europe also offers a well-tested hybrid debt market, widelyused by issuers to fund their aggressive corporate strategies,such as M&A. Hybrids, which receive 50% equity credit at themajor ratings agencies, are seen as a way for companies to raisecheap equity.
US RESTRICTIONS?
Furthermore, an interest rate hike from the Fed in 2015 willconsequently result in higher bond yields and coupons, relativeto equivalent euro investment-grade issues.
"The expected rate increase in the US may have an effect onthe bond take-outs for M&A deals. There's a chance for the euromarket to see more of this supply as absolute coupons are stillvery attractive," Marc Tempelman, co-head of debt capitalmarkets at Bank of America Merrill Lynch said.
Ten-year US Treasury bonds are bid at a yield of 2.26%,while German government bonds of the same tenor are bid ataround 0.60%, according to Tradeweb prices.
European investment-grade credit spreads are expected totighten around 5bp-10bp next year, according to Barclays' 2016Global Credit Outlook.
An expected rise in US default rates could also play inEurope's favour, bankers say, as risk-averse investors will pushcorporate funding costs up further.
The US default rate will reach 5.5% in 2016, compared tothose of Europe, which will stay at this year's levels of around2%, according to Barclays data.
BLOCKBUSTER TRADES
Three deals, including a US$40bn-$45bn bond take-out from ABInBev, a US$22bn financing from Teva and a rumoured US$20bn bondfrom Aetna - for its acquisition of Cigna Corp - are waiting inthe wings.
Teva Pharmaceutical Industries is planning to sellUS$22bn-equivalent across US dollars, euros and sterling topartly finance its acquisition of Allergan's generic drugbusiness.
The other well-flagged bond deal for next year willoriginate from the US$130bn merger between brewer Anheuser-BuschInBev and SABMiller. The deal is expected to result in issuanceacross a mix of currencies, including euros.
In the oil sector, Royal Dutch Shell is expected to issue19bn-equivalent of new bonds in euros, sterling and US dollarsin early 2016, in relation to its proposed US$70bn takeover ofBG Group.
"Euros are likely to remain the funding currency of choicefor US issuers with significant European revenues and forcorporates looking to fund M&A activity," according to MorganStanley's 2016 European Credit Outlook.
Reverse Yankees rounded off a bumper year in 2015, withinvestment-grade euro-denominated issuance topping 57bn,according to Thomson Reuters data.
"Yield differentials and a weaker euro are likely to keepthe reverse Yankee theme alive for longer," said MorganStanley's outlook. (Reporting by Laura Benitez; Editing by Helene Durand andPhilip Wright)
